A Global Correction is Overdue. (2/2/2018)
Believe it or not, I would have liked to have seen a greater pullback in the stock market than the two-day drop on Monday and Tuesday, January 29 and 30. The total drop for those two days was 500 points on the Dow, which sounds like a lot, but it was only 1.87%. According to Charles Schwab & Co., the S&P 500 now has the longest period since 1929 without a correction of more than 5%. The last time a correction of more than 5% occurred was in late June 2016 when BREXIT won the day.
As I read various analyses from many different money managers, I can say that the smart money is looking for a 10% correction. This will reintroduce investors to the reality of risk. The market has been remarkably calm, abnormally so, as the largest pullback in 2017 was only 3%. As interest rates increase and begin to normalize, a return to normal market ebb and flow would also be a welcome development.
On the other hand, it is hard to argue with the abundance of good news! The new U.S. tax law is good for business and investors, and my favorite report illustrating the strength of global demand comes from aircraft manufacturing. According the Wall Street Journal, Boeing and its European rival Airbus produced 1,481 new aircraft combined in 2017, an all-time record number; but it was not enough to reduce their backlog of orders for new planes, which grew to 13,129. This means that Boeing and Airbus can run full tilt through 2027 without adding one single new order. This is what global demand on steroids looks like, and it is not easy to thwart.
Synchronized global expansions are self-reinforcing, and they can carry on for extended periods. According to the International Monetary Fund, 85% of nations increased their exports in 2017, the highest number on record. I am pleased with our commitment to international investing as the USA accounts for less than half the world’s economic activity, and emerging markets with younger populations are growing faster than the U.S.
The U.S. Treasury 10-year began 2018 with a yield of 2.4%, and it closed January at 2.72%. This amounts to an increase in yield of 0.32%, which is a big move up relative to recent activity. As bond yields increase, the market value of existing bonds falls. Generally, you will see that the value of your bond funds fell in January. This is normal and to be expected. You own bonds as a provider of diversification and stability as well as smoother gains during bull markets and gentler losses during bear markets. 2018 is off to a good start, and we always welcome your calls.
Jim Bell, CFP®
President, Chief Investment Officer